Big Trade Deficit Turns U.S. Into Debtor Nation : First Time Since 1914; Situation Threatens to Cut Investment Profits, Worsen Economic Problems
The United States, its trade deficit soaring to record levels, has become a debtor nation for the first time since 1914, the Commerce Department reported Monday.
At the end of last year, the department has said, the rest of the world still owed the United States $28 billion more than the United States owed the rest of the world. But foreigners invested $36 billion more in the United States during the first six months of the year than Americans invested abroad, the department’s figures showed, and sometime during that period the United States began owing more money to other nations than foreigners owed the United States.
Warning by Economists
Economists, although discounting the possibility that the United States could ever face the sorts of problems weighing on such Third World debtor nations as Mexico and Brazil, nevertheless warned that the new development portends a drain of investment profits out of the United States and threatens to further erode the U.S. position in world trade.
The shift from creditor to debtor status occurred as the U.S. current-account deficit--the broadest measure of U.S. financial dealings with the rest of the world--reached $31.8 billion during the second quarter of 1985. That followed a $30.3-billion deficit in the first three months of the year and put the nation on a course toward breaking last year’s record $101.6-billion deficit.
The current account measures trade in services as well as goods and includes the flow of investment profits in and out of the United States.
America’s newly acquired status as a debtor nation means that it no longer can rely on net flow of investment profits to raise the money to finance its mounting trade deficit and federal budget deficit. Instead, foreign borrowings--that is, foreign investments in the United States--are financing the twin deficits--and those borrowings in turn are aggravating the net flow of investment profits overseas.
The Commerce Department, in a report earlier this summer antici pating the slide into debtor status, warned that “a continued large inflow of foreign funds is likely to produce significant future debt service problems for the United States. The larger the U.S. net debtor position, the greater will be the likely U.S. net income payments outflow to foreigners, a net drain on the U.S. economy.”
Rep. Richard A. Gephardt (D-Mo.) said that the Commerce Department’s report of a mounting current-account deficit and the shift to debtor nation status “just adds fuel to the fire” building on Capitol Hill for protectionist legislation aimed at closing the mounting trade deficit.
“It lends credence to the argument that we are not getting beaten in world trade, we’re getting creamed,” said Gephardt, sponsor of one of more than 300 bills threatening steep tariffs and other restrictions against foreign goods.
But Clayton Yeutter, President Reagan’s trade representative, told a group of editors here that a veto of one of the most popular bills--to impose quotas on textile imports--"is almost a sure thing.” The bill, which is expected to be approved today by the House Ways and Means Committee, “certainly” would provoke retaliation from abroad and would cause “enormous damage to the world trading system,” Yeutter said.
Beyond heaping fuel on the current trade debate, the emergence of the United States as a debtor nation could have serious long-range consequences for the nation’s economy. As recently as 1982, the United States was a net creditor to the rest of the world by about $150 billion.
Stephen Marris of the Washington-based Institute for International Economics, who has completed a study of world capital flows over the last century, believes that the current U.S. trend will cause indebtedness to become unmanageably large in just a few years.
If current trends continue, Marris warned, the United States will owe the staggering amount of $1.3 trillion to the rest of the world by 1990, compared to a total foreign debt of about $900 billion currently owed by all Third World debtor nations.
There are two major differences, Marris conceded. First, the U.S. debt consists of voluntary investments by foreign governments, companies and individuals who choose to put their money in a strong currency and an expanding economy. Second, the U.S. debt is in dollars, not in a foreign currency over which the borrower has no control.
Marris said that there is no way creditors will continue to pour money into the United States at anything like the present rate. Such inflows have propped up the value of the dollar against foreign currencies and, if they are reversed, the dollar could lose value suddenly.
Shock to Economy
“Every trader is hooked up to a computer and thinks he can pull out quickly when the dollar falls,” Marris explained. “The worry is the magnitude of the current situation and the shock on the U.S. economy and the rest of the world when it gets corrected quickly.”
In its earlier report, the Commerce Department warned of what would happen if foreigners suddenly quit lending money to the United States and instead sold their U.S. investments.
“A precipitous withdrawal of foreign-owned capital . . . could cause a rapid depreciation in the dollar exchange rate--an undesirable development,” it said. “The resulting upward pressure of U.S. interest rates would require a difficult choice between . . . U.S. economic slowdown or a rapid expansion in the money supply that could accelerate inflation.”